Analysis and criticism of America's most prominent public intellectual and champion of Keynesian economics. I am part of the Austrian School of Economics, and I critique Krugman's writings from that perspective.

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Monday, May 3, 2010

Wages and Unemployment

While Paul Krugman now has switched to promoting environmentalism again (and the fraud of "green energy"), I want to deal today with another problem that he and his friends have helped cause: teenage unemployment rates.

Mayors across the country are rightly worried about Congress’s failure to provide money for the summer jobs that keep teenagers off the streets while giving them sorely needed work experience. Unless the Senate acts quickly, this will be one the bleakest summers on record for youth employment. That raises the very real danger that it could be a violent summer as well.

Furthermore, the NYT even sees the "solution," which at best could be described as a "workfare" program:

The House has approved $600 million for summer jobs for teenagers. The Senate has failed to act. Senate Republicans have blocked a separate proposal by Patty Murray, Democrat of Washington, that would have committed $1.3 billion to create 500,000 summer jobs for the young.

I did the math, and found that such a program (which I doubt seriously actually would employ that many people) would cost $3,000 per job. To people like Krugman and his employer, that might be called an "investment," but to an economist who sees labor as a factor of production, it is called a cost.

There is a dual problem here that goes to the heart both of economic theory AND economic policies, and that problem is that Keynesians like Krugman and True Wooly-Headed Liberals as populate the NYT editorial board (and newsroom) believe that production and consumption are separate and unequal entities. In this viewpoint, the end of production is not necessarily consumption; instead, consumption is what is needed to clear inventories so people can produce more goods and, thus, stay employed.

For example, when Hillary Clinton went to China last year, she essentially told the Chinese that they have to continue to purchase U.S. Government debt so that Americans could use that debt to buy more Chinese goods which, in turn, would "give" Chinese workers their jobs. This viewpoint essentially is the Keynesian position as well.

To these people, all jobs are "welfare" programs at heart, as there is no real connection between production and consumption, and that is a destructive doctrine, for it undermines the ability of people to produce those things which help fulfill our needs. Let me explain.

In a free-market economy, exchange is a voluntary act in which all parties engage because they believe that all will be better off after the exchange takes place. This may not always be the case, as people might be engaging in exchange because of faulty information, but nonetheless, we do trade with one another to improve our own welfare, and that improvement in our welfare is wealth-creating.

In fact, production itself is an act of exchange. When a person works in a free-market setting, that individual generally is creating more wealth than he or she will consume from that act of production. To put it another way, it adds a "surplus" to the economy. Marx believed that "surplus" was "captured" by the capitalists, who did not deserve it.

However, we find that in a free market, that "surplus" adds to overall wealth which then results in more and more goods and services being made available to people who previously would not have been able to afford them. The competition to make better goods also means that over time, the quality of the products should improve. (The computer industry is a prime example here.)

Thus, it is crucial that when one is employed, that the worker is able to be paid according to his or her marginal productivity, or, to use economist-speak, the discounted marginal value product (DMVP). When minimum or "living" wage policies force up wages, the laws of economics still are not repealed (no matter what politicians or the NYT might tell us).

If the law forces up wages past the DMVP, then what happens is that it costs the employers more to have the lower-productivity workers on the job than they can produce. In that situation, the workers lose their jobs.

Even Keynes recognized that fact, but his "solution" (which Krugman accepts) was to employ inflation as a means for cutting wages. (Read Keyne's own words in the General Theory in which he says that workers won't recognize that their real wages are being cut by inflation.)

There is another false argument that Krugman gives, in which he argues that raising the marginal wage would result in greater consumption and, conversely, allowing the marginal wage to fall to where it equals the DMVP would result in MORE unemployment. In his own words:

So let me repeat a point I made a number of times back when the usual suspects were declaring that FDR prolonged the Depression by raising wages: the belief that lower wages would raise overall employment rests on a fallacy of composition. In reality, reducing wages would at best do nothing for employment; more likely it would actually be contractionary.

Here’s how the fallacy works: if some subset of the work force accepts lower wages, it can gain jobs. If workers in the widget industry take a pay cut, this will lead to lower prices of widgets relative to other things, so people will buy more widgets, hence more employment.

But if everyone takes a pay cut, that logic no longer applies. The only way a general cut in wages can increase employment is if it leads people to buy more across the board. And why should it do that?

What is the problem? Krugman confuses marginal with total. Furthermore, he cannot conceive of wages being anything but arbitrary amounts of money being given to people in hopes that they will spend and keep the perpetual motion machine known as the Keynesian economy running.

Thus, because he misunderstands employment at the very fundamental level, Krugman cannot get the rest of the equation correct, either. What Krugman does not understand is that the minimum wage, while not only helping to create record unemployment rates among teenagers, also further distorts the structure of production of an economy and makes things worse over the long run.

True, Keynesians argue that "in the long run, we all are dead," but their policies are helping to put our economy in the grave.

About Me

I teach economics at Frostburg State University in Frostburg, Maryland. We are located on the Allegheny Plateau, and we have cool summers and tough winters.
I am the single father of five children, four of them adopted from overseas and I have two grandchildren. My family and I are members of Faith Presbyterian Church (PCA).